Estimated reading time: 5 minutes
As the number of authorised master trusts rises to six, I thought it was worth considering the impact of the authorisation regime so far, good and bad.
To get the obvious out of the way, the regulation of this market is clearly a good thing; off the back of auto-enrolment we suddenly had the best part of a hundred new propositions entering the market and there was no way all of these were going to be able to gain the critical mass to survive.
The risk of individuals new to saving for their retirement was high, both of being placed in a scheme that wasn’t going to be able to support them, along with the risk of failure of the arrangement altogether. This was clearly the last thing an industry desperately trying to build trust with the British public needed. We now have a vigorous set of safeguards to ensure that these schemes are all fit for purpose.
The authorisation process has required a few extensions, but that seems to be standard at the moment. This, together with the fact that so many schemes have decided not to apply, suggests the standard has been set at a level which puts off those not fully committed. Whether it has been set at a high enough level will be clearer once we see who fails the authorisation process.
It’s also fair to say that the master trust structure itself offers a number of useful features.
"The oversight of a set of trustees that sit separate to the provider will be reassuring to many, especially where they have been members of own-trust schemes in the past and have the relevant experience and gravitas to lead better outcomes for their members."
The structure allows for investment options to be updated as required without member consent (very helpful in a world of ever changing legislation). Also, the ability to receive bulk transfers from receiving schemes and receive future contributions can be helpful for securing benefits from many of the smaller trust based schemes that The Pensions Regulator is targeting for consolidation.
". . . there is no doubt that both the legislation and the very nature of the master trust structure present some challenges."
However, there is no doubt that both the legislation and the very nature of the master trust structure present some challenges.
In terms of the authorisation regime, master trusts will fall into three camps; those who want to comply with the regime, those who don’t intend to but are aware of it and are looking to exit the market in an orderly fashion and those who don’t even realise they are a master trust.
The first group may be a little frustrated at present. From speaking to representatives of several master trusts a number have found the process to be somewhat challenging, not so much in terms of the requirements, but due to the changing messages in terms of what was required and whether there was any benefit in submitting earlier or waiting until the end of the window. Certainly it seems that some waited to submit information and there’s nothing to suggest that those waiting to be authorised are any less suitable than those who have already had this confirmed.
The second group will be where one of the biggest challenges to the sector will come. Just because a scheme wants to exit the market this doesn’t mean to say someone will want to take on its membership and assets. Generally speaking, the schemes wanting to withdraw will be those which have struggled to gain critical mass in terms of membership or assets. So I can’t imagine potential buyers will be queueing up to buy them. This is indeed a real challenge for the regulator; to give schemes time to find solutions that are suitable for members in the long run. Employers that use these master trusts are likely to want to take things into their own hands to identify an authorised scheme sooner rather than later.
Finally there are those (the third group) that are potentially master trusts but don’t even realise it; schemes used by more than one unconnected employer are covered by the requirements, irrespective of whether they are marketing themselves as a master trust. It is highly unlikely they will want to apply for authorisation. We have helped several such schemes (these structures are not uncommon in the charity and not-for-profit sector) take action to correct this categorisation. The Pensions Regulator seems to think there are still a number out there, if its mailings suggesting that schemes consider this are anything to go by.
In terms of their actual structure, the biggest strength of master trusts – the trustee governance and control – can also provide some challenges. I’ve certainly seen some cases where trustees of own-trust schemes have been transferring to a master trust and the receiving scheme trustees have had extensive requirements in terms of obtaining information on scheme history, advice received by the trustees and reviewing the transferring trustees’ communications to members. I understand why they want to be careful, but this can certainly add time and complexity to the process which should be factored into any transition.
". . . due-diligence and ongoing governance should be seen as vital."
Time will also tell how easy it is for employers to drive changes to these arrangements, whether in relation to default investments or even moving benefits to new schemes in the future - given that, ultimately, the master trust trustees retain control of these decisions. It’s certainly worth investigating what the rules of the arrangements are in such areas when deciding whether or not to use one.
In conclusion, due diligence and ongoing governance should be seen as vital for any organisation that either participates in a master trust or is looking to use one in the future. They can certainly provide an excellent solution in the current pensions market, but it’s vital that the right one is chosen. Once this decision is made, it's important that the arrangement is monitored on an ongoing basis to ensure it continues to remains fit for purpose.